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CONSTRUCTION CONTRACT & MANAGEMENT ISSUES
In this third quarter issue of Master Builders Journal for
2010, BK Burns & Ong Sdn Bhd, a subsidiary of BK Asia
Pacific, a regional group providing project, commercial
and contractual management services joins with Entrusty
Group, a multi-disciplinary group, collectively named
as BK Entrusty, presents a new series of contract and
management articles in construction related areas of
project, commercial, contracts, risks, quality and value,
on “Can the Contractor’s employment be determined or
its contract terminated upon substantial completion of
the Works ?”
Introduction
The construction industry is a complex industry with
many parties involved in its process and operations, often
brought together to work for a particular project. Due to
its multi- faceted nature and involvement of numerous
parties, disputes are often inevitable. One common dispute
in the construction industry is the issue of ‘determination’
of the Contractor’s employment or termination of the
contract by the Employer or the Contractor itself.
In this article, BK Entrusty aims to provide readers with
an overview and understanding of this pertinent issue
as to whether the employment of a Contractor (or even
Sub-Contractor) can be determined or its contract (or
Sub-Contract, as the case may be) terminated when
the progress and/or stage of the Works is substantially
completed.
Master Builders Vol 3 | 2010
64
The following are the sub-headings to the contents of
this article;
• Introduction
• Distinction between Determination and Termination
• Common Law Termination
• Contractual Determination / Termination
• Termination for Convenience
• Can Determination or Termination occur when the
Works is substantially completed ?
• Conclusion
• References / Bibliography
We shall first explain the distinction or difference
between the terms “Determination” and “Termination”
in construction contracts, then examine and review the
common routes of termination existing in the laws of
Malaysia, followed by the pertinent contractual clauses on
determination and/or termination in the standard forms
of construction contract commonly used in Malaysia.
Distinction between Determination and Termination
One of the common problems in the construction industry
which often has serious implication on the project and the
parties concerned is the determination of the Contractor’s
employment under the contract or termination of the
construction contract. The Contractor’s employment
can be determined or a construction contract can be
terminated by an express term in the contract such as
determination/termination clauses, or termination at
common law.
Termination is not the same as Determination. It is the
Contractor’s employment which is determined, not
terminated, whereas a contract can be terminated, but not
determined. When the employment of the Contractor has
been determined, the procedures, mechanisms and forms
of recovery and remedies are as provided in accordance
with the provisions of the contract. On the other hand,
when a contract has been terminated, then such recovery
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and/remedies are to be dealt with outside the contract
i.e. at law, when there is no express provision under the
contract.
Further reading on the distinction
between Determination and Termination
can be found in the past MBAM Journal
article by Entrusty on “Is Determination
Of Employment And Termination Of
Contract The Same In Meaning And
Implications” published by MBAM.
Common Law Termination
The termination of contract at common law occurs
when a valid and enforceable contract is brought to an
end either by it becoming impossible to perform due to
unforeseeable circumstances at the time the contract was
formed or by the actions of one or both parties.
In Teh Wan Sang & Sons Sdn Bhd v See Teow Chuan
[1984], the High Court held that:
“A repudiation in advance by one party to a contract,
that he will not perform it before the arrival of the time
for the performance by the repudiating party, does not,
by itself, amount to a breach of contract, though it may
optionally be, of course, regarded as such a breach by
the other party in treating it as at an end.”
In Ching Yik Development Sdn Bhd v Setapak
Development Sdn Bhd [1996], the High Court held
that:
“… where the term that has been flouted is fundamental
to the contract, the innocent party is entitled to treat
himself as being discharged from further obligations
under it. But where the obligation that has been breached
is only subsidiary or minor in nature, the innocent party
may not treat himself as being free of his obligations
under the contract, although he may sue and recover
damages for the non-performance of the subsidiary
term … A party who terminates a contract or treats it as
having come to an end in reliance upon the breach of a
non-fundamental term is himself guilty of a breach of a
contract.”
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From the foregoing two judicial decisions, it can be noted
that not every breach gives rise to an entitlement to
terminate the contract. Only repudiatory breach that
goes to the root of the contract will entitle the innocent
party to terminate the said contract, if the innocent party
accepts such repudiation by rescinding the contract.
In Malaysia, a contract can be terminated in law under
Section 40 of the Contracts Act 1950, which reads:
“When a party to a contract has refused to perform,
or disabled himself from performing, his promise in its
entirety, the promisee may put an end to the contract,
unless he has signified by words or conduct, his
acquiescence in its continuance.”
Contractual Determination / Termination
Most construction contracts whether in bespoke forms or
standard forms of contract, would normally incorporate
an express provision and/or clause, setting out the parties’
rights and remedies in the event of determination of the
Contractor’s employment or termination of the contract.
Clauses 25 and 26 of PAM 2006 Standard Form of Building
Contract provide for the determination of the Contractor’s
employment by the Employer and the determination of
its own employment by the Contractor, respectively.
Similarly, Clauses 44 and 45 of CIDB 2000 Standard Form
of Contract for Building Works provide for determination
by the Employer and determination by the Contractor,
respectively.
In PWD Form 203 (Rev.2007), Clauses 51, 52 and 53
respectively provide for termination by the Employer, as
follows;
• based upon events and consequences of default by
the Contractor;
• on national interest; and
• on corruption, respectively.
It is to be noted that although PWD Forms only provide
for termination of contract, they envisage the procedures,
mechanisms and forms of recovery and remedies to be
within the contract, and not outside the contract. There
is no express provision for termination by the Contractor,
hence any termination by the Contractor can only be
Master Builders Vol 3 | 2010
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done at law, unless the disputing parties agree to a mutual
termination.
Termination for Convenience
Termination for Convenience clauses are predominantly
used by Employers to unilaterally terminate a contract
without having to prove default of the Contractor. Such
clauses have been held by courts to be enforceable, As can be seen from the aforementioned clauses, the
provided that the termination is done in good faith and Employer has been given a unilateral power to terminate
is not fraudulent.
The following standard forms of construction contracts
used locally and internationally have express provisions
for Termination for Convenience by the Employer;
Clause 46.1 of CIDB 2000, which reads, as follows;
“Clause 46.1 Right of the Employer to Terminate
The Employer may at any time, give to the
Contractor 30-Day notice of termination of
the Contract. Upon the expiry of 30 Days from
the receipt of such notice the Contract shall be
terminated.”
Clause 52.1 of PWD Form 203A (Rev. 2007) and Clause 62.1
of PWD Form DB (Rev. 2007), which reads, as follows;
“Termination
a) Notwithstanding any provision of this
Contract, the Government may terminate
this Contract by giving not less than thirty
(30) days written notice to that effect to the
Contract (without any obligation to give any
reason thereof) of the Government considers
that such termination is necessary for national
interest, national policy or national security.”
In a reputable and common international construction
contract, FIDIC, Clause 15.5 of FIDIC 1999 Conditions of
Contract for Construction of Building and Engineering
Works designed by the Employer, provides that;
“Clause 15.5 Employer’s Entitlement to Termination
The Employer shall be entitled to terminate
the Contract, at any time for the Employer’s
convenience, by giving notice of such termination
to the Contractor. The termination shall take effect
Master Builders Vol 3 | 2010
28 days after the later of the dates on which the
Contractor receives this notice or the Employer
returns the Performance Security. The Employer
shall not terminate the Contract under this Sub-
Clause in order to execute the Works himself or to
arrange for the Works to be executed by another
Contractor.”
the contract without the necessity to cite reason/s in
support for the termination.
In the case of Bains Harding (Malaysia) Sdn Bhd v
Arab-Malaysian Merchant Bank Bhd & Others [1996],
the Court had discussed at length the issue of good faith
in the exercising of such termination of convenience
provided under the contract.
Can Determination or Termination occur when the
Works is substantially completed?
From the foregoing discussion, it is clear that determination
and/or termination can be effected through provisions in
the contract based upon specific and/or relevant events
of default by the Contractor such as Clause 25 and 26
of PAM 2006 and Clause 51, 52 and 53 of PWD 2007,
respectively. However, the position can be ambiguous
under the standard forms of conditions of contract as to
whether the Contractor’s employment can be determined
and/or its contract terminated when the Works has been
substantially completed by the Contractor.
In order to answer the aforesaid question, the issue that
needs to be first identified would be whether the contract
and/or agreement between the parties were a divisible
or entire contract. Chitty on Contracts (23rd Edition)
Volume 1 states in paragraph 1147, as follows:
“In an entire contract, complete performance by a
party is a condition precedent to the liability of the
other; in such a contract the consideration is usually
a lump sum which is payable only upon complete
performance by the other party. The opposite of
an entire contract is a divisible contract, which
is separable into parts, so that different parts of
the consideration may be assigned to severable
parts of the performance, e.g., an agreement for
payment pro rata. It is a question of construction
of the contract whether it is entire or divisible, but
in the reported cases (none of which is of recent
date) the courts have tended to the view that in
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every lump-sum contract there is an implied term
that no part of the price is to be recovered without
complete performance. In most modern contracts
of any size, however, payments by instalments are
specified, so that the law on entire contracts is
not often relevant to contracts nowadays.”
In the case of Hoenig v Isaacs [1952], the court held
that:
“… first question is whether, on the true
construction of the contract, entire performance
was a condition precedent to payment. It was a
lump sum contract, but that does not mean that
entire performance was a condition precedent to
payment. When a contract provides for a specific
sum to be paid on completion of specified work,
the Courts lean against a construction of the
contract which would deprive the contractor of
any payment at all simply because there are some
defects or omissions. The promise to complete
the work is therefore construed as a term of the
contract, but not as a condition. It is not every
breach of that term which absolves the employer
from his promise to pay the price, but only a breach
which goes to the root of the contract, such as
an abandonment of the work when it is only half
done. Unless the breach does go to the root of the
matter, the employer cannot resist payment of
the price. He must pay it and bring a cross-claim
for the defects and omissions, or alternatively set
them up in diminution of the price. The measure
is the amount which the work is worth less by
reason of the defects and omissions, and is usually
calculated by the cost of making them good.”
In the High Court’s decision of Ming & Co v Leong Ping
Ching [1964], it was held that:
“… an entire contract is one in which the entire
completion of the work by the contractor is a
condition precedent to payment. A contract in
respect of which progress payments are made
from time to time … is not an entire or lump sum
contract …”
Further, the Federal Court in Tan Hock Chan v Kho
Tech Seng [1980], held that:
“… contract is clearly not a lump sum contract, in
view of the provision for progress payments: Ming
& Co v Leong Ping Ching [1964] …”
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68
From the foregoing judicial decisions, it is evident that a
lump sum contract is construed to be an entire contract
where the complete performance by one party is a
condition precedent to the right to call for the fulfilment
of the contractual obligations of the other party under the
contract. However, a lump sum contract with an express
provision for interim progress payment, does not require
the Contractor to entirely complete his performance of
the Contract before being paid by the Employer. Such
contracts are divisible contracts as opposed to an entire
or a lump sum contract.
A Contractor would not be entitled to any payment, even
partially, if construction contracts are entire contracts,
if the works are not fully completed. Therefore, the
strict application of the rule of complete and/or entire
performance may result in injustice to the Contractor,
particularly when he had substantially performed the
contract but has not completed or reached the stage of
full performance yet, such as minor or inconsequential
defects or omissions.
As a result of the legal difficulties in the rule of entire
contracts, the doctrine of substantial performance
had evolved to allow the Contractor to recover the
contract price but subject to it being adjusted to allow
for deductions of any cross claims for defective works
and the value of the portion of the works that had not
been performed.
What is called “substantial completion” or commonly
known as “practical completion” in the construction
industry usually occurs when the Superintending Officer
(hereinafter referred to as “SO”) is of the opinion that the
works had been substantially completed and so certifies
to that effect. This will trigger the start of the defects
liability period and the Contractor can secure the release
of the first half of the retention money.
The term ‘substantial completion’ is however not explicitly
stated in most forms of standard construction contract,
including PAM 2006 or in PWD Forms. Consequently, one
will need to look to common law for its definition.
In Hoenig v Isaacs [1952], Lord Justice Denning (as he
then was) said that,
“…under the doctrine of substantial performance,
a promisor who has substantially performed his
side of the contract may sue on the contract
for the agreed sum, although he remains liable
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in damages for his partial failure to fulfil his
contractual obligations.”
From the aforesaid doctrine, it is apparent that the
promise to complete the work is construed as a term
of the contract as opposed to a condition. Therefore,
if substantial performance of the contract does not
contribute to the partial failure to fulfil the Contractor’s
contractual obligations that goes to the root of the
contract, termination of the contract may not be
possible.
From the aforesaid judgment, it is clear that the doctrine
applies only to cases and/or circumstances where there has
been part or substantial performance to the contractual
obligations under the contract or where only a minor
part of the contract is incomplete or where performance
is defective. It has no application when there has been no
performance at all.
In a Singapore High Court case of Sapiahtoon v Lim
SiewHui [1963], Buttrose J held that:
“… upon its true construction, the agreement
between the parties was an agreement … for a
lump sum … and that under the exact or strict
performance rule, it would be necessary for the
defendant to show that he had performed his
obligations fully and completely … But the rigour
of the exact performance rule is mitigated by
the doctrine of substantial performance … the
defendant was entitled to the $1,500 withheld
by the plaintiff subject to the plaintiff’s claim for
the cost of completing the building … as well as
remedial work …”
The next issue that required to be examined would be
whether the contract can be terminated if the Contractor
had substantially completed its contractual obligations
under the contract, where works or defects of a minor
nature are still to be executed?
The strict application of the rule of complete performance
would mean that the party could reject such performance,
when there are trivial deficiencies. However, it is not the
position of the law as such a circumstance is relieved by
the legal maxim of de minimis which means that ‘the law
does not concern itself with trifles’.
In the case of Bolton v Mahadeva [1972], the English
Court of Appeal indicated that:
69
“… where a contract has been substantially
performed, the test was substantial performance
and not whether the defects were of such a trifling
nature that they could be disregarded under the de
minimis rule and in considering whether there had
been substantial performance it was relevant to
take into account both the nature of the defects
and the proportion between the cost of rectifying
them and contract price.”
In addition to the above and as reported in the book of
‘Contract Law in Malaysia’, in Shipton, Anderson & Co v
Weil Brothers & Co [1912] where there was a contract
for the sale of a cargo of wheat. The contract provided
for the delivery of not more than 4,590 tons. The plaintiff
delivered a surplus of 55 pounds, not claiming for the
surplus, but the defendant buyer rejected the whole
cargo. The court held that:
“… the excess was so trifling that it could be
ignored.”
From the foregoing judicial decisions, it is apparent that
substantial performance had been achieved.
It is also evident from judicial decisions, as described
hereinafter, that de minimis defective works do not
amount to abandonment and/or refusal to perform the
contract. It is merely a carelessness and/or negligence
insofar as workmanship is concerned.
In the English Court of Appeal’s case of H Dakin & Co
Limited v Lee [1916], Lord Cozens-Hardy MR dealt with
the case, as follows;
“… in a contract … for a lump sum, the defect in
some of the items in the specification, or the failure
to do every item contained in the specification,
puts an end to the whole contract, and prevents
the builders from making any claim upon it; and
therefore, where there is no ground for presuming
any fresh contract, he cannot obtain any payment.
The matter has been treated in the argument as
though the omission to do every item perfectly
was an abandonment of the contract. That seems
to me, with great respect, to be absolutely and
entirely wrong …”
In another Court of Appeal’s case of Young (t/a All
Counties Tarmacadam) v Thames Properties Ltd and
Another [1999], the Court held that:
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“… as one of negligence and bad workmanship, and
not as a case where there has been an omission
of any one of the items in the specification. The
builders … had done all that was intended to be
done in reference to the contract; and I suppose
the defects are due to carelessness on the part of
some of the workmen or of the foreman: but the
existence of these defects does not amount to a
refusal … to perform part of the contract …”
Further, Pickford L J agreed and said in his judgment:
In view of the above, Employers must exercise with care
and be absolutely sure with respect to determination of
employment or termination of a construction contract
when it reaches the stage of substantial completion,
otherwise the Employer determining or terminating can
be in repudiatory breach situation and liable for damages
on wrongful termination.
In the next issue of the MBAM journal, BK Entrusty article
will deal with a common contractual issue on “What is
Head Office Overheads claim ?”

“… I cannot accept the proposition that if a man References/Bibliography

agrees to do a certain amount of work for lump
sum every breach which he makes of that contract
1. Chitty on Contracts (23rd Edition) Volume 1.
by doing his work badly, or by omitting some small
portion of it, is an abandonment of his contract
2. Sir Anthony May, Adrian Williamson & John
…”
Uff, ‘Keating On Building Contracts’ (6 Edition)
1995.
From the foregoing judicial decisions, it is obvious that in
a situation where a Contractor has committed de minimis
3. John Uff, ‘Construction Law’ (Ninth Edition)
defective works when its works reached the stage of
2005.
substantial completion, the Employer may not be able to
terminate the contract in the absence of a contractual
4. Sundra Rajoo, Dato’ WSW Davidson &Ir Harban
provision entitling the Employer to do so.
Singh KS, ‘The PAM 2006 Standard Form of
Building Contract’ 2010.
The remaining question is whether the Employer
can terminate the contract with a “termination for
5. Krishnan Arjunan, Abdul Majid bin NabiBaksh,
convenience” clause when the physical works on site have
‘Contract Law in Malaysia’ (2008).
reached the stage of substantial completion. The answer
may lies in whether the termination was exercised in bad
faith such as when the termination was for the purpose 6. Entrusty Group, ‘Is Determination Of Employment
of avoiding paying for the balance of the profit on the And Termination Of Contract The Same In
remaining works. Such termination will constitute as a Meaning And Implications ?’, Master Builders
breach of contract and wrong at law. Journal (2nd Quarter 2008), MBAM.

Conclusion

Substantial completion of Works for a construction

contract certainly constitutes incomplete fulfilment
of the Contractor’s contractual obligations under the
contract. However, whether it is a ground for termination
or determination is very much dependent on the
intention/action of the contracting parties. In common
law termination, substantial completion with de minimis
defective works may not be sufficient for the Employer
to rescind or terminate the contract unless the breach
is so serious and fundamental that goes to the root of
the contract, such that the Employer cannot use it for its
intended purposes.
Entrusty Group is a multidisciplinary group of companies
which comprises Entrusty Consultancy Sdn Bhd (formerly
known as J.D. Kingsfield (M) Sdn Bhd), BK Burns & Ong
Sdn Bhd (a member of BK Asia Pacific Ltd, Hong Kong),
Pro-Value Management Sdn Bhd (in association with
Applied Facilitation & Training, Australia) ,International
Master Trainers Sdn Bhd (in association with Master
Trainer of New York), Agensi Pekerjaan Proforce Sdn
Bhd, Alpha-Omega Matrix and Entrusty International

Master Builders Vol 3 | 2010

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Pte Ltd. The Group provides comprehensive consultancy,
advisory and management services in project, commercial,
contracts, construction, facilities, risks, quality and
value management, cost management, executive
search/personnel recruitment and corporate training/
seminars/workshops to various industries particularly in
construction, petrochemical, manufacturing and IT, both
locally and internationally. For further details, visit www.
entrusty.com.
• One Day or Two Days Intensive Seminar (with
workshop) on Practical Construction Claims in
Malaysia.
• 10 Half Day or 5 Full Day Modules on Practical
Construction Contract Administration / Management.
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Right”.

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BK Asia Pacific is group of companies incorporated in the
Asia Pacific Region providing a comprehensive network
of project management, commercial and contract
management services to the international construction
industry, with offices in Cambodia, China (Hong Kong,
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further details, visit www.bkasiapacific.com.

BK Entrusty provides 30 minutes of free consultancy

(with prior appointment) to MBAM members in the areas
of project, commercial, contracts, risks, quality and value
management, For enquiries, please contact HT Ong at BK
Entrusty, 22-1& 2 Jalan 2/109E, Desa Business Park, Taman
Desa, 58100 Kuala Lumpur, Malaysia. Tel: 6(03)-7982 2123
Fax: 6(03)-7982 3122 Email: htong@entrusty.com.my or
htong@bkasiapacific.com

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71 Master Builders Vol 3 | 2010